Date: 28 Mar 2018

The Canadian dollar (USDCAD) caught a tailwind at the end of last week when inflation in Canada printed at 2.2 per cent year-on-year in February, way above January’s 1.7 per cent reading, and its highest print it hit 2.4 per cent in October 2014. The conundrum facing the Bank of Canada (BoC), which has hiked interest rates 3 times since July 2017, is that while inflation data might suggest a further increase in interest rates might be appropriate, economic growth data in Canada hasn’t been too buoyant. The BoC will also be mindful of the fact that continuing uncertainties over the re-negotiation of NAFTA (even if the recent mood music has been more upbeat) have a bearing on the pace of any future Canadian rate hikes.

That said, on Thursday, Canada will release gross domestic product (GDP) data for January with a consensus forecast of a month-on-month rise of 0.1 per cent. However if there’s a pick up in retail sales volumes, remembering that in the fourth quarter of 2017 Canadian household consumption was something of a drag on Canada’s GDP, there’s a risk that Thursday’s number could come in above consensus. One Canadian bank, RBC, has already suggested that “a 0.1 per cent or 0.2 per cent gain would be consistent with [their] monitoring of 1.9 per cent q/q annualized growth for Q1, which would be above
the BoC’s 1.6% estimate for potential growth.” That kind of outcome, coupled with last Friday’s CPI data and more soothing noises on NAFTA, could re-energise CAD bulls. Traders will decide, but as the market waits for Thursday’s Canadian GDP data, traders may wish to also bear in mind that, if USDCAD is in the vicinity, the price action on Wednesday may be partly shaped by the purported existence of a sizeable expiry (xxx) with analysts at IFR having identified a USD1.3 billion 1.2850 xxx

Written by Neal Kimberley, External Currency Analyst.